Watkins and the balancing act

As a former consultant,
GrainCorp
chief executive
Alison Watkins
is an expert at Powerpoint presentations including ones for full-year earnings that read more like a takeover defence. Watkins did a good job yesterday of presenting a growth strategy for Graincorp as she rejected the conditional $2.7 billion takeover proposal from Archer Daniels Midland, the American oilseed giant.

Apart from announcing record profits for 2012 and a higher dividend, Watkins showed she will be squeezing as much as she can out of Graincorp’s diverse asset base.

She says Graincorp’s integrated business model covering marketing, processing and storage-logistics can be cranked up to add another $110 million in underlying earnings before interest, tax, depreciation and amortisation by the end of 2016.

That promise and the dividend lift helped to keep the GrainCorp share price around $12.20, or about 4 per cent above the conditional proposal of $11.75 from ADM.

However, a problem for Watkins is that ADM has already convinced owners of 19.9 per cent of the issued capital that $11.75 a share is a fair valuation for the company given its history of volatile earnings.

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Watkins has tried to counter the accusation of volatility of earnings by highlighting the last four year average EBITDA of $388 million. About 30 per cent of the company’s issued capital has turned over since the ADM proposal was made public and there are some who believe at least 10 per cent of that went to hedge funds.

Shareholders such as Ellerston Capital may agitate for Watkins and the board to engage with ADM. Hedge funds are usually impatient. They may be increasingly so if the stock falls when it goes ex-dividend after payment of the 20¢ ordinary final dividend and 15¢ special dividend declared yesterday.

ADM, on the other hand, likes to present itself as “disciplined and patient". It has sat on a 16 per cent stake in Singaporean agribusiness group Wilmar for 10 years and it walked away from a making a bid for Canadian group Viterra, which was taken over by Glencore. It is obvious why ADM wants to buy Graincorp. It has a unique network of grain silos and ports on the east coast of Australia that cannot be replicated.

This battle has a long way to go and it is hard to see any significant developments before Christmas.

As the annual meeting season draws to a close many boards will be asking the same question posed recently by the Corporations and Markets Advisory Committee: what is the future of the annual meeting? This year’s meeting season included the usual mix of informative sessions interspersed with long periods of turgid questioning of directors.

The same thorny issues that have plagued annual meetings for years still remain. While retail shareholders dominate attendance figures, on average, they own less than 1 per cent of the issued capital of public companies. They usually like to ask questions, vote and then enjoy a cup of tea or sandwich.

The institutional shareholders who, on average, own 60 per cent of the issued capital, are nowhere to be seen. They lodge voting proxies in advance and by weight of numbers make the show of hands for voting a pointless exercise. As the Australian Investor Relations Association says “share ownership is a plutocracy not a democracy".

Serious negotiations about controversial resolutions,such as the remuneration report, are usually done by the big institutions behind closed doors well before the annual meeting.

It is rare for a board to be ambushed on the day of the meeting. When it does happen, as occurred at the
Lend Lease
annual meeting on Thursday, it exposes a breakdown in communications between the company and its owners.

On the question of ownership and control it is often forgotten that shareholders have a very limited capacity to influence the affairs of a company. As one observer said: “the corporation cannot be managed by shareholder referendum".

Companies are run by boards who delegate authority to the chief executive and his or her executive team. That principle has sparked a debate in the United States about whether it is the duty of the board to “maximise shareholder value" or put in place other motivation models that benefit many stakeholders for the good of society. Either way, for most companies, the annual meeting is the only opportunity each year for the board and shareholders to engage.

Boards need to structure AGMs to meet the diverse interests of shareholders. A survey by law firm Allens Linklaters found that while 70 per cent of its clients thought the annual meeting need reform only 40 per cent were in favour of replacing it with a shareholder briefing and a separate electronic voting process.

At one extreme is the investor relations officer who told Chanticleer the perfect annual meeting had the voting done in five minutes and the whole thing over in 15 minutes.

At the other end of the spectrum is a company like
Telstra
which held many town hall-style information meetings around the country before its AGM. This succeeded in making the 2012 meeting the shortest on recorded at 90 minutes.

Annual meetings will have to evolve to take account of the greater use by shareholders of different technologies as well as the rising power of self-managed super funds. These could become a force for reform because their trustees are dominated by baby boomers who usually get what they want.